Climate change policy choices and technical innovation

Climate policy makers, faced with the tradeoff between the damaging effects of greenhouse gases and the costs of reducing them, often look to technological change as the solution. However, good incentives for developing and making use of climate-friendly technologies depend critically on whether good climate policies are in place. This paper considers the economic forces that drive the creation and implementation of cleaner technologies. Greenhouse gas abatement policies are compared for the incentives they create for firms to innovate. A distinction is made between the innovations that lower one's own costs and those that can also be applicable to other firms. Climate policies compare differently depending on how widespread are the opportunities for technological adoption and the extent to which innovations can be imitated. The interaction between innovation and environmental policies over longer time horizons are also discussed, as well as the appropriate role for government in the research, development, and diffusion of climate-friendly technologies.